On March 7, 2013, the FDA will hold an advisory committee meeting for Theravance's (NASDAQ:THRX) drug Breo. At this meeting, the committee will evaluate the efficacy and safety of Breo for the treatment of chronic obstructive pulmonary disease (COPD). After reviewing Breo's clinical trial results and relevant scientific literature, we believe Breo will receive a positive vote at the committee meeting. Consequently, we anticipate Theravance's stock price will appreciably increase over the next five trading days.
Theravance is a biopharmaceutical company with multiple drug candidates currently under development. Its respiratory pipeline consists of four drug candidates: Breo, Anoro, GSK961081, and TD-4208. Each of these development programs is in collaboration with GlaxoSmithKline (NYSE:GSK) except the one for TD-4208. Thus far, the FDA has accepted new drug applications for Breo and Anoro. Theravance also markets the drug Vibativ, which treats skin infections.
Breo is a once-daily medicine for patients with chronic obstructive pulmonary disease (COPD). COPD is estimated to affect 250 million people globally and about 4% of people in the United States. The disease mainly occurs in adult smokers who are greater than 40 years of age. If left untreated, COPD can cause serious complications such as heart disease, lung cancer, and depression. During the course of disease, symptoms may periodically or permanently deteriorate due to infection, exposure to airborne pollutants, or improper adherence to prescribed medical therapies. These deteriorations are known as exacerbations.
Approved treatments for moderate to severe COPD consist of long-acting beta-2 agonists (LABAs), long-acting muscarinic antagonists (LAMAs), and combination therapies with a LABA and an inhaled-corticosteroid (ICS). LABAs and LAMAs open up airway passages and ICSs reduce inflammation. An example of an ICS/LABA therapy is GSK's twice-daily medicine fluticasone propionate/salmeterol (trade name Advair Diskus, hereafter referred to as Advair), in which fluticasone propionate is an ICS and salmeterol is a LABA. Breo is a new ICS/LABA treatment. Its ICS component is fluticasone furoate (FF), and its LABA component is vilanterol (VI). Breo, also known as FF/VI, is administrated via Theravance's proprietary inhaler named Ellipta. The long half-life of VI makes it possible to deliver Breo once daily rather than twice daily. Due to the similar formulations of Breo and Advair, Breo is viewed as a successor to Advair. Notably, one of Advair's key patents expired in 2011, indicating that Advair sales may significantly decrease if and when generics become available. At this point, there is no approved generic version of Advair.
Breo improves lung function and reduces exacerbations
To date, GSK has completed five pivotal phase III clinical trials evaluating the efficacy of Breo. In three of these trials, patients were randomly grouped and then treated with placebo, FF alone, VI alone, or different doses of an FF/VI combination. The combination of FF at 100 micrograms (mcg) and VI at 25 mcg (represented as 100/25) significantly and consistently improved lung function relative to placebo or FF alone. Note that this FF/VI dose is the one that was submitted to the FDA for approval. The once-daily dosing schedule also proved to be effective throughout the six-month study period. Two of these three studies (ref1, ref2) each involved more than 1,000 patients for 24 weeks; the third study involved 54 patients for 4 weeks. All three studies showed similar results.
The remaining two pivotal trials (ref1, ref2) compared FF/VI to VI alone for the reduction of moderate to severe exacerbations. In both trials, more than 1,500 patients were treated for 52 weeks. FF/VI 100/25 consistently demonstrated significant reduction in exacerbations relative to VI alone. However, the results for other doses of FF/VI (i.e., 50/25 and 200/25) were less convincing. However, Theravance is not seeking FDA approval for these doses. In summary, FF/VI 100/25 significantly improves lung function for COPD patients when compared to placebo or FF alone. Additionally, this FF/VI dose reduced exacerbations better than VI alone.
GSK also conducted three twelve-week, non-pivotal phase III clinical trials comparing Breo 100/25 to Advair. In one of these trials, Breo improved lung function significantly more than did Advair. In the other two trials (ref1, ref2), Breo showed a slight numerical advantage but did not reach statistical significance. These results may be disappointing at first glance. However, Breo demonstrated non-inferiority to Advair, which is one of the most effective medicines for COPD and holds the largest market share globally. Furthermore, doctors and patients may favorably view Advair's once-a-day dosing schedule, especially given that non-compliance can lead to exacerbations. Overall, the non-pivotal trial data are quite positive in nature and should help Breo gain FDA approval.
Breo is generally well tolerated
Breo has a similar adverse event profile to placebo, FF alone, and VI alone. For example, the combined frequency of serious adverse events in the two 24-week pivotal trials was 5.6% (23 out of 410) for FF/VI 100/25 and 5.1% (21 out of 412) for the placebo. Only two cases from each group were considered likely related to the treatment. Overall frequencies of serious adverse events were also quite similar between Breo 100/25 and Advair (1.7% vs. 1.7% across three combined studies).
Nevertheless, in both 52-week pivotal trials, all doses of FF/VI increased the frequency of pneumonia when compared to VI alone. In one study, the frequency increased from 4% to around 8%. In another study, the frequency increased from 3% to around 6%. At first pass, these results are somewhat worrisome. However, it should be noted that increased incidence of pneumonia is a known problem for ICS therapy. A meta-analysis involving eighteen clinical trials and about 17,000 patients showed that combination therapy using ICS increases the risk of pneumonia by more than 60%. Breo's safety profile, therefore, is in line with other approved ICS/LABA medicines.
Fatal pneumonia from the 52-week trials could be a concern
Six cases of fatal pneumonia and one case of fatal COPD exacerbation with concurrent pneumonia were reported in one of the 52-week studies. Affected patients were receiving Breo. However, all cases were in the 200/25 group. Notably, the 100/25 group reported zero cases. All seven of these cases occurred at a single investigational site, from over 180 total sites in the study. Additionally six cases were considered to be unrelated to the treatment. In another study, one incidence of fatal pneumonia was reported in the 100/25 group, but it was also determined to be unrelated to the treatment. Regardless, the issue of fatal pneumonia certainly highlights potential safety risk. However, pneumonia is a known, frequent complication of COPD and the co-occurrence of these fatal cases at a single site suggests they may be incidental.
Breo faces long-term competition from other COPD drugs
In the United States, there are more than ten drugs approved for the treatment of COPD. Potential competitors of Breo include Advair, Spiriva (produced by Pfizer (NYSE:PFE) and Boehringer Ingelheim), Symbicort (produced by AstraZeneca (NYSE:AZN)), and Combivent (produced by Boehringer Ingelheim). Future generic versions of Advair may also compete with Breo, especially given that Breo did not consistently outperform Advair in its clinical trials. Theravance has two ongoing clinical trials directly comparing Breo to Spiriva. However, the biggest competition may come from future drugs such as Theravance's Anoro, Novartis's (NYSE:NVS) QVA149, and Boehringer's olodaterol/tiotropium bromide. All three of these drugs use a LABA/LAMA combination, which generally appears to have fewer side effects due to the absence of ICS. Both Anoro and QVA149 have demonstrated efficacy better than that of Spiriva in their phase III trials. Therefore, it is unlikely that Breo will hold significant market share in the long run. Nevertheless, Theravance's Anoro is likely to be the first LABA/LAMA drug launched in the United States. Its PDUFA date is December 18, 2013.
Putting it all together
We believe that Breo will receive a positive vote during its upcoming advisory committee meeting and that this will positively influence Theravance's stock price. Theravance's stock closed at $20.92 on March 1st and is likely to be quite volatile immediately before and after the advisory committee meeting on March 7th. Therefore, a strangle options strategy - a purchase of both long and short options of the same maturity but with different strike prices - may be suitable to hedge against the downside. Currently, the last price (excluding trading fees) of an April expiration call option with an exercise price of $19 is $3.60. Similarly, the last price of an April expiration put option with an exercise price of $18 is $1.70. Considering the efficacy and safety profiles of Breo together with an existing 23% short interest in the stock, a three to one (or higher) call/put ratio would allow downside protection but an unlimited upside to take advantage of a positive advisory committee vote that may be augmented by short covering.
Additional disclosure: Beacon VP Investments is a team of analysts. This article was written by Hubo Li, one of our team members.